PM End of Week Market Commentary - 10/16/2015

On Friday, gold fell -5.60 to 1177.40 on moderate volume, while silver dropped -0.09 to 16.03 on moderately light volume. Both metals traded in a fairly narrow range, and both seemed to find support on the 200 MA after suffering some modest selling.

On the week, gold rose +21.80 [+1.89%], silver climbed +0.21 [+1.33%], GDX moved up just +0.80%, and +12.22% and GDXJ rose +2.45%. Platinum was up +3.44%, while palladium fell -2.19% - falling for the first time in six weeks.

By closing above 1170, gold has established an uptrend on the daily chart - a pattern of higher highs, and higher lows. Gold has successfully crossed the 200 MA, and held above it for three days running. Now it is at a decision point. Either the 200 MA acts as support - as it has for the past few days - and gold moves higher to test resistance at 1206, or gold starts correcting as it did back on Aug 24th.

By establishing an uptrend, gold increases the chances that the next correction will be relatively mild. This is because some number of traders will have switched viewpoints; some number of them will start buying the dips rather than selling the rallies. In addition, the close above the 200 MA will have the attention of traders who have remained on the sidelines, waiting for a change in trend prior to jumping in. These traders too will be looking to buy the dips.

The new high we just saw in gold won't prevent a decline, but it will probably make the dips we see in gold shallower.

That said, I see hints of a top right now. The RSI momentum indicator has peaked and has now dropped below 70. Last time this happened, we experienced a $40 correction. Same thing could happen this time. If gold does manage to rally instead of correcting, that's a very bullish sign - it says that traders can't bear to wait to buy the dip, they want to buy in right here and now.

Silver's daily momentum is slowing down, as demonstrated by the bearish divergence on the RSI. A bearish divergence is when the price chart moves higher, but the RSI declines. This pattern sometimes, but not always, ends up in a correction. Silver remains above its 200 MA, which is a good sign, but I am concerned it has the possibility of correcting in the near future. Bulls have not been able to push prices substantially higher than last week.

Miners

Miners managed to close convincingly above the old high at 16.25, they remain above the 9 EMA, and they are now in an uptrend on the daily chart. What's more, momentum remains solidly up - there is no bearish divergence on the RSI. However, miners printed a swing high on Friday, which is a potential sign of a top. The volume on the swing high wasn't huge, but if you add this to the signals we are getting for silver and gold, the miner swing high is starting to look a bit ominous at least for the near term direction of PM.

The USD

The dollar fell once again this week, dropping -0.30 to 94.59. However, there was a substantial dollar rally on Thursday, and there is a chance that the buck may be in the process of putting in a low. On the weekly chart, the buck printed a small hammer candle - and the Euro printed a gravestone doji. A dollar recovery of some sort is quite possible in the coming week. This would provide headwinds to PM.

The dollar continued dropping against most non-DX currencies this week. The Real was a notable exception - it wiped out all its gains from last week.

SPX continued its rally from last week, moving up +18.22 to 2033.11. After seemingly looking ready to top out earlier in the week, SPX found support on its 9 EMA and rallied strongly to finish the week above the previous SPX high. Uptrend for SPX remains intact.

Was this a Fed plot? As always, I ask: how did the rest of the world do? It was a mixed bag. Regionally, the US did about "middle of the pack." US was not a standout.

With my "fundamental analysis" hat on, there's absolutely no way I'd buy here. Declining earnings, bad manufacturing data, INDPRO tipping over, weak Nonfarm Payrolls - it all sounds pretty dire. It IS pretty dire, recession-level stuff. And this week Wal-Mart suffered a huge loss after disappointing earnings were released. It looks like Wal-Mart surprised the market, and not in a good way.

But from a technical perspective, it is not wise to in front of moving trains. If you are looking to enter short, and the market reverses, you bail out of your short position and wait for the next opportunity to appear.

VIX dropped to 15.05. VIX has unwound almost all of the premium dating back to Aug 24th. Those who bought puts during the depths of the angst in August have most probably lost their entire premium by now.

Gold in Other Currencies

Gold rose in every currency this week. Gold in XDR was up +28, or about 2%. You can see the dollar is rallying nicely in most currencies, and is now entering a 6-month uptrend even against the strongest currencies: CNY, and USD.

Rates & Commodities

Bonds (TLT) rose +1.35%, a surprisingly strong performance given the equity market rally, and the falling dollar. My sense is that institutions are moving from cash/bank deposits into both stocks and bonds as the rate rise is now off the table. I read an article where a bank asset manager (for Wells Fargo, I believe) said exactly that. Prices seem to be supporting his position. Perhaps that's the real genesis of the twin stock and bond market rally: money is rotating from cash (a good position in a rising rate environment) into other assets that provide yield.

Junk bonds (JNK) moved up slightly, rising +0.19% and closing right under its 50 MA. If it can close solidly above the 50, it will suggest more upside ahead for JNK. If the shale drillers aren't going to default tomorrow, the pressure for dumping junk bonds right now will decline. You might as well collect that 6% for another six months, and THEN dump the junk - or so the thinking probably goes.

The CRB (commodity index) fell -1.60% retracing much of its gains from last week. While CRB remains above the 50 MA, and the 9 EMA which is the sign of a medium term uptrend, in truth it appears to be struggling to maintain that upward momentum. It is a case of 4 steps forward and 3 steps back for commodities. Still, its better than a poke in the eye with a sharp stick.

WTIC was unable to break above the 50 level this week, and sold off sharply, rescued in the last few days by a modest rally. WTIC closed down -1.76 [-3.56%] to 47.73. It remains in an uptrend, and even the 200 MA is now starting to flatten out, indicating that the longer term downtrend is coming to an end. Brent doesn't look quite as strong - that's because the Brent/WTIC premium has declined to $2.60, a far cry from the $12 it had back in March 2015.

Rig counts continue to decline in most shale regions, but overall US oil production continues to climb.

Physical Supply Indicators

* Premiums in Shanghai are now at +2.52 over COMEX, down vs last week.

The COT report covered trading through Oct 13th, when gold closed at 1165.80 and silver 15.90.

Gold commercials increased their shorts by a big 25.8k, as they usually do when price rises. Gold commercial shorts are moving closer to a point where the overall size is starting to become a concern. Depending on how many shorts they added during trading on Wed-Fri, we could be at that level of concern right now. Another 25k shorts, and the commercials will be signaling that a near-term decline is likely.

Managed money covered a big 18.4k shorts this week; I estimate they still have (as of Tuesday) another 30k remaining to cover, so we are not at the danger point yet. We are moving closer, however.

In silver, commercials added 5k shorts, and sold 4k longs; as a result, the net commercial position is definitely in the danger zone right now. This "danger zone" more often than not marks the "cycle peaks" for silver's short term market cycles. Commercials go short/sell longs at the highs, and they cover short/go long at the lows. They are the smart money. Here's what I mean:

Managed Money covered 7k shorts and added 6.7k longs. That's just in time for the top. Managed Money net position is as lop-sided as the commercials, but on the other side of the trade. Silver COT report is signaling a probable top in the near term.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

We saw two crossings of the 200 MA this week, from both gold and silver. All 50 MAs are now rising. Gold is getting close to erasing its 52 week decline; only 4.5% away. The steady progress is what you would expect as the longer term trend changes from down to up. The 50/200 cross (the "golden cross") is still several months away, assuming the trend continues moving higher.

Gold continued moving higher this week, silver stalled out, and the miners continued to climb but ended on Friday by printing a swing high. Gold's progress was about 60% short covering, and 40% new long exposure. Since we are starting to run low on gold shorts for the rally to feed on, we need more longs to appear to keep prices moving higher.

The gold/silver ratio rose this week, climbing +0.40 to 73.45, which is not something you want to see if you're a bull. The GDX:$GOLD fell slightly, but continues to look bullish. GDXJ:GDX ratio rose on the week and is starting to look a little less bearish. Its not as positive a picture as we saw last week.

The COT reports are showing clear near-term danger signs for silver, and hinting at a similar danger to come for gold. Gold still has some more room left, but it too is nearing a likely cycle high point, based on the level of commercial short exposure and my assessment for how much short selling happened in the last two days.

Gold and silver big-bar physical shortage indicators are unchanged; in the west, ETF premiums were mostly lower, GLD tonnage rose, and gold futures remain in backwardation at COMEX. In the east, premiums in Shanghai are down a bit. Big bar premiums at HAA are more or less holding steady, while silver coin premiums have dropped quite sharply. Silver eagles still aren't reasonably priced, but 24% sure beats 40%.

PM has clearly broken out of its medium term downtrend and established an uptrend on the daily charts. This is fantastic progress, but everything moves in cycles, and for every cycle there is a peak and a valley. I believe we are closer to the peak than the valley for this particular cycle in PM. We may have one more good week ahead of us - if so, that's very bullish for gold overall. We also may not, which would be more of the normal outcome. My computer has turned negative on silver, somewhat negative on the miners, but not yet on gold. The computer sees a likely dollar rebound soon.

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